Monday, June 29, 2009

Keynes did not support deficit spending to support the economy. Ever. At least if one can believe the Palgrave encyclopedia of economics [1998 edition] ...

"Despite the fact that the economics of deficit finance began with the Keynesian Revolution, it has been conclusively established by Kregel (1985) that Keynes himself did not ever directly recommend government deficits as a tool of stabilization policy. Keynes played a conservative political hand and viewed budget deficits with a 'clearly enunciated lack of enthusiasm'."

Keynes advocated government spending in some circumstances to strengthen an economy -- but not deficit spending. Noted previously here was the fact that in 1937, when the unemployment rate in Britian was 11%, he opposed a government spending stimulus program.

What happened? Some of Keynes' first-generation disciples observed that the calendar year is an arbitrary time period for judging "budget balance" and concluded, not entirely unreasonably, that using the full length of the business cycle would be better -- so a deficit during one stretch of a multi-year cycle would be offset by surpluses during others, creating balance overall.